Walmart, Carrefour Are Closer to Entering India But Profit Will Take Longer

Distribution, Real Estate and Other Challenges Face First Foreign Retail Giants in World's Second Most Populous Market

Published on December 01, 2011.

WalmartStores and Carrefour waited seven years for access to India's $400 billion retail market. They may have to wait almost as long to make a profit in the world's second most populous nation.

Expensive real estate, a warehouse shortage and congested roads will force foreign retailers to spend about $382 million on supply systems, said Anand Ramanathan, associate director at KPMG Advisory Services in India.

India on Nov. 24 said it will allow overseas companies to invest up to 51% in retail stores selling more than one brand. The decision, which ends at least seven years of debate, may benefit local merchants, such as Pantaloon Retail India, that foreign retailers need as partners. The market will almost double to $785 billion by 2015, London-based Business Monitor International estimates.

"It will take at least two to three to five years before we see the full impact of this change in policy," said Saloni Nangia, senior VP at Technopak Advisors. "While all these retailers would invest in the supply chain and food processing, it's going to take time, so this expectation that things would transform very soon or overnight won't happen."

Overseas retailers such as Tesco and Metro may not be able to set up more than 10 stores each in the first year and may take at least five years to break even because of infrastructure and real estate hurdles, Mr. Ramanathan said. "I don't think any of the foreign players is looking at a return over the next five years," he said.

Pantaloon, which began as a men's clothing retailer in 1997, operates as many as 498 supermarkets and department stores and more than 17 million square feet of retail space, according to the company's website. Reliance Industries Ltd., India's largest public company, has more than 1,200 stores through a subsidiary.

India's retail industry will get investments of $8 billion to $10 billion over the next five to ten years as overseas competitors enter and local companies spend to keep pace, according to billionaire Kishore Biyani, Pantaloon's founder and managing director. "It's still going to be a while" before a foreign retailer can catch up, Mr. Biyani said in a Nov. 18 phone interview.

Walmart has 14 wholesale outlets through a joint venture with Bharti Enterprises, Germany's Metro owns six and France's Carrefour announced the opening of its second wholesale store on Nov. 28.
Less than $1 billion of Walmart's $422 billion sales last year came from India. The company has plans to aggressively expand its India operations, Scott Price, CEO for Asia, said in March.

The chains face the challenge of finding affordable locations and the competition may intensify as newcomers enter, said Mr. Nangia. As the industry grows, "spaces won't be available where the customers are," said Mr. Biyani.

Real-estate costs for retailers have risen at least 2 1/2 times since 2006, according to Kumar Rajagopalan, chief executive of the Retailers Association of India. Merchants in India pay 9% to 10% of revenue in rent, he said. The global average is 3.5% to 4%, Mr. Rajagopalan said.

Retailers such as Carrefour, the world's second-biggest, and Tesco, the U.K.'s largest supermarket chain, face infrastructure that lags China's and Brazil's. "There are still very frequent power outages in a number of cities and the roads need a hell of a lot of improvement in terms of operating an efficient supply chain," said Bryan Roberts, director of retail research at Kantar Retail in London.

That means the global chains need to build trucking and distribution systems in India, where government estimates show 40% of fruit and vegetables rot before being sold because of a lack of cold-storage facilities and poor transport infrastructure.

Indian consumers also tend to buy groceries in neighborhood shops. Organized retail operations -- professionally managed chains, as opposed to family-owned independent stores -- account for just 5% of the retail market, according to the Associated Chambers of Commerce and Industry of India. "It's a country in which infrastructure is not fully developed," said Mr. Rajagopalan. "For any individual to travel to a large store is not the easiest of things."

Political pressures remain. Shops and markets across India were shut today as traders supported a daylong strike demanding the government scrap its decision on foreign investment.

States have a say in allotting licenses and West Bengal may not allow foreign investment in retailing, Chief Minister Mamata Banerjee said in televised comments Nov. 28.

Foreign firms "still need to be cautious about rushing in," said Kantar's Mr. Roberts. Arti Singh, an India spokeswoman for Bentonville, Arkansas- based Walmart, didn't respond to calls. Carrefour India spokesman Mohan Shukla said it was too early to comment on retail plans.

"Their story in India is not short term," said KPMG's Ramanathan. "These companies will not be able to face their boards if they decide not to enter India."